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Research Team research@mna.com.my 03-22877228 ext 229,221,249,238
Ma
rket
Acc
ess
BUY (TP: RM2.30)
IPO Retail Price (RM) RM1.80
Fair Value (RM) RM2.30
Previous Value (RM) NA
Previous Recomm. NA
Upside/(Downside) To Target 27.7%
Dividend Yield (FY15) 3.2%
Listing Details
Listing Sought Main
Market
Listing Date 15th May 2015
Stock Information
Shariah Status
Yes
Sector
Power&Uitlities
Total IPO Shares (mn) 1,521
Institutional Offering (mn)
757,500
Retail Offering (mn) 242,500
Market Cap (RM mn) 9,000
Share Capital (mn)
5,000
Par Value (RM)
0.1
Major Shareholders
MMC
37.9%%
EPF
19.4%
KWAP 6.5%
Malakoff Corporation Berhad (Malakoff) will be making
its re-entrance in Bursa Malaysia on the 15th
May 2015.
Malakoff stable outlook will be supported by impressive
recurring business in power generation and water
divisions that boasted by its long term power purchase
agreement with respective governments. Based on DCF
valuation pegged at WACC of 6.0%, we initiate coverage
on Malakoff with a fair value of RM2.30. Our target price
offers 27.7% upside potential and hence, it’s a BUY.
Corporate Profile
Malakoff is involved in 2 main businesses comprising of;
1) power generation business and 2) water producer. In
power generation business, its portfolios involve in both
domestic and international market with effective
generation capacity of 6,036 MW. In Malaysia, Malakoff
is the largest independent power producer (IPP) with
effective generation capacity of 5,346 MW coming from
its 6 power plants. Its portfolios outside Malaysia are
located in the Middle East and Northern Africa (MENA)
and Australia with combined effective capacity of 690
MW. In water production and desalination, its assets are
mainly located in the MENA region with effective water
production capacity of 358,850m³/ day.
Investment Highlights:
Largest “pure play” IPP in Malaysia with overseas
exposure
Malakoff is a power and water producer player with
strong presence locally and internationally. The Group
currently owns power generation assets with total
effective generation capacity of 6,036 MW, comprising
5,036 MW in Malaysia, 480 MW in MENA region, 210 MW
in Australia and water production capacity of
Malakoff Corporation Berhad
“Return of the
Giant”
7 May 2015 Thursday 14767/09/2012(030761)
Initiation Coverage: Malakoff Corporation Bhd
M&A Securities
Initiation Coverage – Malakoff Corporation Bhd
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
358,850m³/ day in the MENA region. Locally, through its subsidiaries Malakoff owns 4 combines
cycle gas turbines (CCGT) power plants and 1 coal-fired thermal power plant, and through
associates, Malakoff have interest in one plant multi-fuel power generation facilities located in
Peninsular Malaysia.
Internationally, Malakoff also owns 3 power generation plants in Bahrain, Saudi Arabia and
Australia; and 4 water desalination plants in Bahrain, Saudi Arabia and Algeria. Malakoff
involvement in international assets got started in 2006, shortly before the Group stripped its listing
status by its parent. Since then, Malakoff continued to augment its international portfolios through
organic growth and acquisition of equity stake.
Long term uninterrupted cash flow
Malakoff has stable recurring revenue contribution from its power business and water desalination.
Its revenue is anchored by long term concession contract as long as 16 years in Malaysia and 23
years outside Malaysia. In Malaysia, all Malakoff’s power plants are fully contracted through all
power purchase agreement (PPA) 1, 2 and 3, awarded by government since 1992. The maiden power
generation asset by Malakoff is Port Dickson Power Plant (436 MW) which schedules to expire in
2016. Its latest addition of portfolio is Tanjung Bin Power Plant (4th
Phase, still in construction)
located in Johor, with 25 years contract through PPA3 expiry in 2031. Internationally, Malakoff’s
longest term concession is in Australia through Macarthur Wind Farm that was acquired last year.
Notably, Malakoff is backed by established and reputable international network of vendors and
strategic partners, including Alstom Power, AGL, Toshiba, Tenaga Nasional Bhd (TNB), Khazanah,
Petronas, Acwa Power, Sumitomo and IPR-GDF Suez.
Outstanding acquisition track record and sturdy performances
Since it’s delisting in 2007, Malakoff had utilised the interval with busy activities by acquiring more
power and water generation assets with 2-3 years of acquisition intervals starting with Tanjung Bin
in 2007 and subsequently international power and water assets. Prior to Tanjung Bin, Malakoff’s
chequered track record in managing Port Dickson Power Plants enabled the Group to win more
tenders from government. This started with Segari Energy Ventures (SEV) in 1996, GB3 in 2002, Prai
in 2003 and subsequently Tanjung Bin in 2007, and preying more greenfield as government intended
to step up current reservation charge. This will be another impetus why Malakoff will be in the
front line to secure more power plant development in the future.
Targeting more roles in coal fired power plants in Malaysia.
The shortage in natural gas supply as happened in 2011 had forced power generation plants to opt
consuming expensive fuel supply namely oil and distillates which carries expensive cost compared
to natural gas. Based on this incident, government are now tweaking power generation plants to use
coal as fuel supply due to uninterrupted supply and cost effectiveness. Malakoff won the slice of
the coal power plant through Tanjung Bin which is the largest coal power in Southeast Asia, and the
Initiation Coverage – Malakoff Corporation Bhd
te
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
plant has the capability to fire 2,100MW at full capacity. Due to their outstanding track record,
Malakoff was awarded with further 1000MW in Tanjung Bin that utilises coal as fuel supply that
brings effective install capacity to 3,100 MW. Given this, we expect Malakoff to play a bigger role if
government decided to construct more coal generated power plant in the future.
Experienced, skilled and qualified management team
Malakoff has involved in the power generation since 1992 and water desalination since 2006
with respectable track record in various parts of the world. Malakoff has been able to impress
the government in countries it operates in by delivering a cost effective solutions in every
tender they bided. This success was led by pool of senior managements that highly
knowledgeable and experiences in utilities and power generation industry.
Respectable business partner
Malakoff’s international portfolios assets are impressive with its ability to secure projects
considered as national interest. The success lies on its track record that manage to attract
respectable business partner such as Acwa Power to construct Shuaibah Phase 3 IWPP and
Shuaibah Phase 3 Expansion IWP in Saudi Arabia. In Algeria, Malakoff is partnering with Hyflux
Engineering Pte Ltd to construct Souk Tieta IWP, and led consortium comprise of Sumitomo and
Cadagua to construct AlGhubrah in Oman. Partnering various world class name contractors
essentially lifted Malakoff name in securing more national interest projects in the future.
Table 1: Malakoff strategic partners
Malakoff Strategic Partners
Source: Prospectus
Initiation Coverage – Malakoff Corporation Bhd
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
Eyeing more overseas expansion
Limited opportunity to expand its portfolio in Malaysia, Malakoff is banking on its track record and
experience to secure more overseas project, in line with Malakoff aspiration to grow its overseas
capacity to 12,000 MW by 2020 from 6036MW in 2014. For the initial, Malakoff is eyeing to supply
electricity to Singapore and Thailand where management said to have put the relevant discussion
with the respective government.
Impressive Dividend Policy and Yield
Malakoff introduced a new dividend policy with a payout ratio of not less than 70% of net profit.
This bold move is powered by its stable recurring business in power and water division. All in all, at
70% net profit, Malakoff dividend yield is set to reach 3.2% based on the listing price of RM1.80.
This marks Malakoff on par with dividend yielding stock in the conglomerate stocks space.
Company Background
Malakoff was incorporated in 1975 operating in plantation-based industry and was first listed in
1975 of the Kuala Lumpur Stock Exchange (KLSE). In 1993, Malakoff underwent major corporate
restructuring exercise involving Malakoff disposing its plantation based assets and went into power
generation business. Malakoff grew its power generation assets by developing greenfield power
plants and acquiring brownfield ones, comprising the maiden Port Dickson Power Plant in 1993, SEV
Power Plant in 1996, the GB3 Power Plant in 2001, Prai Power Plant in 2003, Kapar Power Plant in
2004 and Tanjung Bin power Plant in 2007. During Malakoff absence from Bursa Malaysia, Malakoff
utilized the interval to augment its power generation asset locally and internationally, as well as
venturing in water production outside Malaysia.
In 2007, Malakoff’s parent, MMC Corporation (MMC) took the decision to strip Malakoff listing status.
This involved MMC’s wholly-owned subsidiary, Nucleus Avenue (M) (NAB), by making an offer to
acquire the assets (other than cash) of Malakoff for RM9.3 billion. Pursuant to that, MMC pared
down its stake in Malakoff to 51% from 100%, and the rest were snapped by Employee Provident
Fund (EPF) (30%), Kumpulan Wang Persaraan (KWAP) (10%), Standard Chartered Private Equity Pte
Limited (6.5%) and Seasaf Power (SEASAF) (2.5%) from NAB.
Apart from power generation, Malakoff also provides operation and maintenances (O&M) business to
all its majority-owned power plants and associates assets as well as third parties. Malakoff also
operates an electricity and chilled water distribution located in buildings in KL Sentral apart from
project management services.
Operations
1. Malaysia independent power generation business
Malakoff is the largest IPP in Malaysia with 24.9% market share based on effective power
generation capacity of 5,346MW, representing 22.5% of Peninsular Malaysia's total installed
capacity. Currently Malakoff owns 6 power plants. All are located in Peninsular Malaysia.
Initiation Coverage – Malakoff Corporation Bhd
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
Malakof Power and Water Asset
(As at 2014)
Source: Prospectus
Table 2: Malakoff’s Power and Water Assets
Plant Name Location Plant Type PPA
Expiration
Gross Capacity
(MW)
Effective Equity
Participant
Effective Capacity
(MW)
In Malaysia
Tanjung Bin Power Plant Johor Coal 2031 2,100 90% 1,890
SEV Power Plant Perak CCGT 2027 1,303 94% 1,222
Kapar Power Plant Selangor Multi-fuel 2019/29 2,420 40% 968
GB3 Power Plant Perak CCGT 2022 640 75% 480
Prai Power Plant P.Pinang CCGT 2024 350 100% 350
Port Dickson Power Plant N. Sembilan CCGT 2016 436 100% 436
Total effective power generation capacity, inside Malaysia 5,346
Outside Malaysia
Hidd IWPP Bahrain Water/Natural Gas/Distillate
Oil 2027
410,000 m3/day, 929
40% 164,000 m3/day
372
Shuaibah Phase 3 IWPP Saudi Arabia Water/Oil 2030 880,000
m3/day, 900 12%
105,600 m3/day
108
Souk Tleta IWP Algeria Water 2036 200,000 m3/day
36% 71,400 m3/day
Shuaibah Phase 3 Expansion IWPP
Saudi Arabia Water 2029 150,000 m3/day
12% 17,850 m3/day
Macarthur Wind Farm Australia Wind 2038 420 50% 210
Total effective water production capacity 358,850 m3/day
Total effective power generation, capacity, outside Malaysia 690
Total effective power generation capacity, inside and outside Malaysia 6,036
Under Construction
Tanjung Bin Energy Power Plant
Johor Coal 2041 1,000 90% 1,000
Al Ghubrah IWP Oman Water 2034 191,000 m3/day
45% 85,950 m3/day
*Offered a renewal to operate SEV Power Plant for another 10 years until 2027 **Kapar Power Plant has 4 phases. The term of the PPA of the 4th phase expires in 2019 and the term of the PPA for the other 3 phases expires in 2029 Source: Prospectus
Initiation Coverage – Malakoff Corporation Bhd
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
2. International independent water production and power generation business
Malakoff had stepped up from its comfort zone by diversifying its portfolio into overseas and
venturing new business stream. Over the years, Malakoff had augmented its asset portfolios in
overseas namely Saudi Arabia, Oman, Bahrain, and Algeria with IWP and IWPP business, and
wind farm in Australia with total effective capacity of 690 MW and water production capacity of
358,850 m³/day. At these IWPPs and IWPs, water is, or will be, produced through the
desalination of seawater.
3. Operation and maintenance business (O&M)
Apart from power generation and water production business, Malakoff also provides O&M
services to its own power plants as well as to power plants and water plants owned by certain of
its associates, JV and third-party clients. Malakoff had previously provided operations and
maintenance services to PETRONAS' cogeneration power plants, the Kerteh Centralised Utilities
Facilities and the Gebeng Centralised Utilities Facilities, under five-year operations and
maintenance contracts that expired in 2004, and continues to maintain the ability to offer these
services to third party clients in Malaysia as well as overseas.
Table 3: O&M Project Summary
Plant Name Location Ownership Generating Capacity
(MW)
Commercial operation
date O&M term
In Malaysia
SEV Power Plant Perak Subsidiary 1,303 1993 31 yrs
GB3 Power Plant Perak Subsidiary 640 2000 21 yrs
Prai Power Plant P.Pinang Subsidiary 350 2000 21 yrs
Tanjung Bin Power Plant Johor Subsidiary 2,100 2004 25 yrs
Tanjung Bin Energy Power Plant
Johor Subsidiary 1,000 2012 25 yrs
Port Dickson Power Plant N.Sembilan Subsidiary 436 2003 14 yrs
Outside Malaysia
Shuaibah Phase 3 Expansion IWP
Saudi Arabia Associate 150,000 m3/day
2007 20 yrs
Shuaibah Phase 3 IWPP Saudi Arabia Associate 880,000
m3/day, 900 2006 20 yrs
Souk Tleta IWP Algeria Jointly
controlled entity 200,000 m3/day
2007 25 yrs
Al Ghubrah IWP Oman Associate 191,000 m3/day
2013 20 yrs
Merak Coal-Fired Power Plant
Indonesia Third Party 120 2013 5 yrs
Az Zour Emergency Power Plant
Kuwait Third Party 1,200 2013 4 yrs
Source: Prospectus
Initiation Coverage – Malakoff Corporation Bhd
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
Table 4: Chronology of Events
Years Events
1975 Incorporated in Malaysia
1993 Shift plantation operations to power generation
1995 Port Dickson Power Plant commenced operation
1996-1997 SEV Power Plant commenced operations
1998 Acquired 100% interest in Teknik Janakuasa SB (O&M business)
2001-2002 GB3 Power Plant commenced operations
2003 Prai Power Plant commenced operations
2004 Acquired 40% interest in Kapar Power Plant
2006-2007 Tanjung Bin Power Plant commenced operations Acquired 20% interest in Dhofar Power, Oman
2007 Taken private by MMC Corp Acquired 12.75% interest in CEGCO, multi-fuel power plant in Jordan
2009-2010 Disposed 46% interest in Dhofar Power Company Saog Shuaibah Phase 3 Expansion IWP & Shuaibah Phase 3 IWPP commenced operations in Saudi Arabia
2011 Souk Tleta IWP commenced operations Awarded concession for construction of Tanjung Bin Energy Power Plant
2012 Acquired 40% interest in Hidd Power Disposed 12.75% interest in CEGCO Acquisition of HICOM Power SB
2013 45%-owned MCDC awarded concession to undertake the Al Ghubrah IWP project in Oman Acquired a 50% stake in Macarthur Wind Farm in Victoria, Australia
2014 Acquired remaining 75% stake in Port Dickson Power Plant Source: Prospectus
Selected Future Plan Analysis
Expand power generation platform to meet increasing electricity demand
Not stopping anytime now, Malakoff is eyeing to expand its current capacity of 6,036MW to 13,000
MW by 2020. This includes venturing into overseas by rapidly increasing its effective power
generation capacity to 3000MW vs. 690 MW currently. In water production business, Malakoff
intends to increase its effective water capacity to 530,000 m³/day vs. 358,850 m³/day in 2020.
However, we understand Malakoff is looking at Southeast Asia market currently, including selling
capacity to Singapore and Thailand by leveraging on its experiences and notable track record. This
includes leverage on its reserve land on its existing power plants amounting to 400 hectares. The
majority of the lands are located in Kapar and Tanjung Bin, where the lands still have relatively
long lease tenure of 47 years on average enabling to build another infrastructure on the site.
Diversify into renewable power generation
As natural fuel supply is unsustainable, Malakoff foresee renewable power generation will play an
important role in the future by setting up Green Technology Unit with the objective of building a
renewable power generation portfolio by 2020. The similar sentiment is echoed by government, as
the latter plans to increase renewable power generation capacity (excluding large-scale
hydroelectric power plants) to 2080 MW by 2020. Malakoff’s participation in Mcarthur Wind Farm
located in Australia is certainly an eye-catching to the government if the latter decided to grow
renewable energy seriously.
Initiation Coverage – Malakoff Corporation Bhd
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
Opportunity in Pengerang
In the recent years, Energy Commission has invited TNB and IPPs to participate in the open tender
to open new generation power plants, but Malakoff had so far unable to secure any new generation
power plant other than Tanjung Bin extension in 2012. Note that Malakoff is switching to direct
negotiation method, rather than open tender in the local turf. That said, Malakoff is in the midst of
discussion with Petronas to participate in a 1,300 MW co-generation power plant that forms
Petronas’s Refinery and Petrochemicals Integrated Development (RAPID)
Expand O&M business and chilled water distribution business
Currently, O&M business contributed 1% of revenue in FY14 through Malakoff Power that operates
O&M for Malakoff. To grow further revenue contribution to Malakoff, Malakoff Power is further
exploring opportunities in providing operations and maintenance services to third-party power and
water plants by capitalizing on its experience by managing own joint venture (JV) and associate
generation power plants.
IPO Details
Malakoff is seeking for listing on the Main Market of Bursa Malaysia on 15th
May 2015. Issue price
for both institution and retail are set at RM1.80 and expected to rake market capitalization of
RM9 billion upon listing.
Table 5: IPO Details
Activity No. of Shares (mil)
Existing issued and paid up capital 4,000,000
New shares to be issued pursuant to the public issue 1,000,000
Enlarged issued and paid-up capital upon listing 5,000,000
IPO Price RM1.80 Source: Prospectus
Table 6: Offering Details
Categories Offer for Sale
(mil) Public Issue
(mil) Total (mil)
Retail Offering:
Eligible Malakoff person 180,000
Eligible MMC person 2,500
Eligible Shareholders of MMC 72,000
Malaysian Public
Bumiputera 75,000
Non-Bumiputera 75,000
Total Retail 242,500
Institutional Offering:
Cornerstone 521,740
Bumiputera investors approved by MITI 550,000
Foreign institutional and selected investors 207,500
Total Institutional 521,740 757,500
Grand Total 521,740 1,000,000 1,521,740 Source: Prospectus
Initiation Coverage – Malakoff Corporation Bhd
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
Selling shareholder
Table 7: Selling Shareholder
Selling Shareholder
Pre-IPO Shares offered
Post-IPO
Over-allotment option is not
exercised
Over-allotment option is fully
exercised
No. of Shares (mil)
% of existing share
capital
No. of Shares (mil)
% of enlarged
share capital
No. of Shares (mil)
% of enlarged
share capital
No. of Shares (mil)
% of enlarged
share capital
AOA 1,142 28.6% 149.56 3.0% 992.73 19.8% 927.30 18.5%
EPF 1,200 30% 227.86 4.6% 972.13 19.4% 872.44 17.4%
KWAP 400 10% 75.95 1.5% 324.04 6.5% 290.81 5.8%
SCI Asia 260 6.5% 49.37 1.0% 210.63 4.2% 189.03 3.8%
SEASAF 100 2.5% 18.98 0.4% 81.01 1.6% 72.70 1.5% Source: Prospectus Utilization of proceeds
Malakoff will not receive any proceeds from the IPO and Malakoff plans to fully utilize the
proceeds to fully redeem its junior Sukuk Musharakah which bears a profit rate of 6.3% per annum
until September, and a profit rate of 9.3% thereafter with a tenure of 30 years maturing in 2042.
IPO Timetable
Table 8: IPO Timetable
Activity Date
Prospectus launch 17 April 2015
Institutional offering 17 April-29 April 2015
Retail offering 17 April-28 April 2015
Listing 15 May 2015 Source: Prospectus Financial Review
Malakoff derives its revenues primarily from power generation business in Malaysia as a result of
PPA signed between TNB and government. In FY13, Malakoff bottomline has been hit by
operational issues, primarily in Tanjung Bin and Kapar power plants, resulting in lower revenue in
FY13 to RM4.71 billion from RM5.58 billion in FY12. Due to operational issues, Malakoff received
lower capacity payment due to lower capacity despatch as well as unable to meet certain KPI set
by TNB. However, the situations have improved since FY14 with Malakoff managed to solve the
boiler issue in Tanjung Bin, hence pushed contribution from Tanjung Bin to surged to 23.6% y-o-y
to RM2.8 billion vs. RM2.28 billion in FY13.
Entering FY15, we expect all Malakoff plants to run smoothly without unplanned outages, hence
will lift FY15 revenue to RM6.44 billion vs.RM5.5 billion in FY14. The 15% y-o-y grow in Malakoff’s
revenue will be partly assisted by Port Dickson Plant’s contribution, that was acquired from Sime
Darby in FY14.
Initiation Coverage – Malakoff Corporation Bhd
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
In FY16, we project Malakoff revenue and earnings will surge by 21.7% y-o-y and 38% y-o-y due to
the commission of Tanjung Bin’s 1000 MW, which will push Tanjung Bin capacity to 3,100 MW vs.
2100 MW currently. However, we note that Malakoff’s earnings in FY18 will be stagnant tempered
by SEV plant PPA extension that will run in FY18. Under the PPA extension for 10 years, SEV plant
will receive lower capacity payment as part of renegotiation with EC as SEV plant is classified
under 1st generation of power plant, hence less capital expenditure is required to run the plant
operation.
Given the steady demand growth driven by convincing economic momentum in all Malakoff’s
business footprints, we expect Malakoff to be able to deliver a steady earnings momentum. The
steady earnings trajectory means that investors will be rewarded steadily via impressive dividend
payout which the company aims to deliver not less 70% payout ratio.
Selected Risks
Rely on TNB as the sole off-taker
Under the PPAs, IPPs in Malaysia will solely rely on TNB as the sole off-taker for the power
produced by IPPs at their respective plants. Given this, over 90% Malakoff’s revenue will be
derived from capacity payment paid by TNB. That said if any default payment occurs by TNB, it
may jeopardize Malakoff earnings and potentially Malakoff to lower their electricity
production. However, this may not be the case as we believe TNB is fully backed by
government.
Withdrawal of electricity subsidy.
The eventual withdrawal of electricity subsidy may result in a dent in electricity consumption
and this may adversely affect service provider like Malakoff. Although the withdrawal is
inevitable in the long run, we expect the short term adjustment will be mild given that the
government is determine to cut the electricity subsidy gradually in order to avert distortion in
the economic activity.
Unable to meet certain terms in the PPA.
As said, IPPs’ revenue is derived from TNB capacity payment. On top of that, there are certain
key performance indicators (KPIs) set by TNB, Government and EC such as availability factor,
number of days for planned scheduled outages and efficiency of the plant. In the event that
Malakoff fails to meet some of this KPI, it may receive lesser capacity payment from TNB. This
had happened on its power plant in Tanjung Bin where the boiler issue have been plaguing the
plant performance, hence the revenue contribution from this plant was lesser than its normal
run capacity.
Shortage in fuel supply.
To run the generation power plant, Malakoff requires fuel supply to generate electricity. That
said the inability to secure fuel supply e.g. natural gas, coal, oil and distillates may threaten
Initiation Coverage – Malakoff Corporation Bhd
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
Malakoff operation. The majority of Malakoff plants in Malaysia are formed by 4 CCGT power
plant, 1 coal and 1 multi fuel. Hence, Malakoff needs the fuel supply from various sources.
i. Gas supply from Petronas and TNB
Malakoff‘s CCGT plants currently purchase natural gas from Petronas, pursuant to
respective Gas Sales Agreement (GSA) that run concurrently with each PPAs
between Petronas and IPPs. As gas includes LNG price is highly regulated by
government, Malakoff and all IPPs need to purchase the gas supply from Petronas as
the sole supplier in the country. Based on the PPAs, Malakoff and IPPSs are able to
pass the cost of fuel back to TNB known as energy payment.
ii. Coal from TFS
Under the PPAs, Malakoff is required to purchase coal requirement from TNB Fuel
Sdn Bhd (TFS) that run concurrently with Coal Supply and Transportation Agreement
(CSTA) between Malakoff and TFS to ensure a steady and quality of coal to be used
by the power plant. Based on this practice, we believe Malakoff is unable to take
advantage of cheaper coal price in the market by procuring from other sources than
TFS procured on long term practice. Should Malakoff receives the authority to
procure its own coal requirement, we believe Malakoff will able to minimize its fuel
cost especially on coal cost as Malakoff will be able to leverage on Pelabuhan
Tanjung Pelepas to store its coal requirement, thus benefiting the Tanjung Bin
Plant.
iii. Oil and distillates from various sources
Malakoff multi-fuel plant currently purchases oil from the same vendor of TNB Fuel
that stipulated in the PPA. On the other hand, distillates are purchase on spot
market purchases, making its volatile to the changes in distillates price.
Policy change. Operating in foreign land in MENAs and Australia may pose Malakoff to
policy change risk. The government can decide to terminate the concession given to service
provider although we find this possibility very remote at this juncture given the long term
agreement that was signed. Nevertheless, policy change can stunt Malakoff desire to
aggressively penetrate these countries and may result in opportunity loss as a result.
Initiation Coverage – Malakoff Corporation Bhd
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
Industry Overview
1. Malaysia power sector
In Malaysia, the demand for power in Malaysia has been growing in tandem with GDP growth over
the years. In 2014, Malaysia recorded a higher growth of gross development product (GDP) of 5.8%
y-o-y in 4Q14, and 2014 recorded higher ever electricity demand on 11th
June 2014 at 16,901 MW.
Frost & Sullivan estimates that the demand for the electricity consumption in Peninsular Malaysia to
grow at a CAGR of 3.5% from 110,193 GWh to 126 GWh in 2018 driven by steady economic growth.
Peninsular Malaysia remains as the primary consumer of electricity in Malaysia, consuming about
90% of the electricity generated. While Sabah and Sarawak have been growing at a faster pace of
8.3% and 16.6% respectively, we notice the electricity consumption in Sarawak was marginally
higher than Sabah in 2013 (Sarawak 510 GWh, Sabah 574 GWh). However the CAGR consumption
since 2007 was higher in Sabah at 4.8% due to expanding customer base and rising demand
compared to Sabah (Sarawak 4.2%, Peninsular 3.5%).
IPP was first emerged in 1992 following a nationwide power blackout, associated with shortage of
power generation capacity. Subsequently, the first 5 IPP license were awarded to the private
sector. The tariffs for first IPPs were also notably higher, which facilitated capital market financing
for the first wave IPPs. The first generation of IPPs weremostly gas-fired, commencing operation in
1993 and 1994, followed by second generation of IPPs in 1998 and 2001 and third generation of IPPs
in 2003 onwards.
Table 9: First-Generation IPPs in Malaysia
Licensee Capacity (MW) Type of Plant Licensed
Capacity (MW) Date of Issue of
License
YTL Power, Generation Paka, Terengganu Pasir Gudang, Johor
2 X 390 1 X 390
Combined Cycle Combined Cycle
780 390
7/4/1993
Genting Sanyen Power Kuala Langat, Selangor
1 X 762 Combined Cycle 762 1/7/1993
Segaru Energy Ventures Lumut, Perak
2 X 652 Combined Cycle 1,303 15/7/1993
Powertek Alor Gajah, Melaka
4 X 110 Gas Turbines 440 1/12/1993
Port Dickson Power Tanjung Gemuk, Port Dickson
4 X 110 Gas Turbines 440 1/12/1993
ARL Tenaga Melawa, Sabah
4 X 13 Diesel Engines 50 14/6/1994
Musteq Hydro Sg. Kenerong, Kelantan
2 X 10 Mini Hydro 20 18/11/1994
Serudong Power Tawau, Sabah
3 X 12 Diesel Engines 36 1/4/1995
Total installed capacity 4,221 Source: Prospectus
Initiation Coverage – Malakoff Corporation Bhd
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
Table 10: Second-Generation IPPs in Malaysia
Licensee Capacity
(MW) Type of Plant
Licensed Capacity (MW)
Date of Issue of License
Stratavest Sandakan, Sabah
4 X 15 Diesel Engines 60 1/10/1996
Sandakan Power Corporation Sandakan, Sabah
4 X 9 Diesel Engines 34 29/11/1997
TNB Janamanjung
3 X 700 Coal 2,100 21/5/1998
Teknologi Tenaga Perlis Consortium Kuala Sungai Baru, Perlis
1 X 650 Combined Cycle 650 26/8/1998
Nur Generation Kulim, Kedah
2 X 220 Combined Cycle 440 17/9/1998
Pahlawan Power Tanjung Keling, Melaka
1 X 334 Combined Cycle 334 26/5/1999
Prai Power Seberang Perai, Pulau Pinang
1 X 350 Combined Cycle 350 20/2/2001
GB3 Lumut, Perak
1 X 640 Combined Cycle 640 7/8/2001
Panglima Power Alor Gajah, Melaka
1 X 720 Combined Cycle 720 7/8/2001
Total installed capacity 4,688 Source: Prospectus
Table 11: Third-Generation IPPs in Malaysia
Licensee Capacity
(MW) Type of Plant
Licensed Capacity (MW)
Date of Issue of License
Tanjung Bin Power Tanjung Bin, Johor
3 X 700 Coal 2,100 26/9/2003
Kapar Energy Ventures Kapar, Klang
2 X 300 2 X 300 2 X 500 2 X 110
Thermal Coal Coal
Gas Turbines
2,420 1/7/2004
Jimah Energy Ventures Jimah, Port Dickson
2 X 700 Coal 1,400 22/3/2005
Sepangar Bay Corporation Kota Kinabalu, Sabah
1 X 100 Combined Cycle 100 18/5/2006
Ranhill Powertron Karambunai, Sabah
2 X 95 Combined Cycle 190 13/6/2006
Ranhill Powertron II Kota Kinabalu, Sabah
190 Gas Turbine 190 11/9/2009
Total installed capacity 6,400 Source: Prospectus
Initiation Coverage – Malakoff Corporation Bhd
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
Table 12: Planned New Generation Capacity in Malaysia
Commencement (Year)
Name Location IPP Capacity (MW)
2015 Manjung 4 coal-fired power plant Perak Yes 1,010
2015 Connaught Bridge Repowering Plant Selangor No 385
2015 TNB Hulu Terengganu Plant Phase 1 Terengganu No 250
2016 TNB Hulu Terengganu Plant Phase 2 Terengganu No 15
2016 TNB Ulu Jelai Plant Pahang No 372
2016 Tanjung Bin Energy Power Plant Johor Yes 1,000
2016 TNB Prai Power Plant Penang Yes 1,071
2016 Genting Sanyen Power Plant Selangor Yes 675
2017 PETRONAS Cogeneration Pengerang Power Plant
Johor No 400
2017 Segari Energy Power Plant Perak Yes 1,303
2017 TNB Sultan Iskandar Power Plant Johor No 275
2017 Track 3A Power Plant Perak Yes 1,000
2018 Chenderah Hydroelectric Power Plant
Perak No 12
2018 Track 3B, Unit 1 Negeri Sembilan Yes 1,000
2018 Track 4A Gas Turbine Power Plant Pahang No 1,000-1,400
2019 Track 3B, Unit 2 Negeri Sembilan Yes 1,000
2020 Tekai Power Plant Pahang No 156
Total 10,924-11,323 Source: Prospectus
2. Australia power sector
Australia electricity consumption in 2012-2013 was at 249,884 GWh, having been relatively stagnant
at a negative CAGR of 1.1% and this trend continued to the following year at –0.3%, mainly
associated with reduction in electricity generation using coal, due to the introduction of the carbon
pricing. Moving forward, the government has forecasted the electricity demand to grow with a
CAGR of 2% from 2008-2009 to 2019-2020, reaching a total electricity consumption of 310,000 GWh
by 2019-2020. As a developed country, the government is looking to promote renewable sources
e.g. wind, solar and hydro through various measure such as Renewable Energy Target (RET) and the
establishment of Renewable Energy Agency (ARENA) and Clean Energy Finance Corporation (CEFC)
which targets 20% of Australia installed capacity to be generated by renewable resources by 2020.
In 2013 alone, a total of 18 plants (705 MW) inclusive of wind, solar, hydro, biogas and geothermal
plants were commissioned. Wind is expected to play an important role in renewable energy in
Australia due to its high return and safe environment and commonly used. In 2013, the installed
capacity of wind generation is 3,240 MW from 68 farms with the largest contributor is MaCartthur
wind farm at 420 MW.
3. MENA power and water supply
Total electricity consumption in MENA region has increased at a CAGR of 4.7% from 2008 (607,081
MW)-2013 (765,046 MW) and Frost & Sullivan anticipates that electricity demand in this region will
further grow at a CAGR of 9.4% to reach 1,184,118 GWh by 2018. The huge growth projected was
associated of integration of water production and power generation plant as a measure to meet the
electricity demand, while combating the water scarcity.
Initiation Coverage – Malakoff Corporation Bhd
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
a) Algeria.
Electricity consumption increased at a CAGR of 6.7% to 45,060 GWh in 2013 from 32,584 GWh in
2008, while water consumption grew to 17.7 million m³/day in 2013 at a CAGR of 1.8% from
16.2 million m³/day in 2008. Frost & Sullivan forecasts that electricity consumption will grow
at a CAGR of 7.5% between 2014-2018 due to urbanization and population growth. On water
segment, Frost & Sullivan estimates water consumption to grow at a CAGR of 3.4% from 2014 to
2018 coming from 13 water production plants with a total capacity of 2.3 million m³/day along
the country coastline.
b) Bahrain
Electricity consumption increased at a CAGR of 6.6% to 13,350 GWh in 2013 from 9,719 GWh in
2008, on the back of higher electricity consumption from commercial sector. Frost & Sullivan
forecasts electricity consumption to grow at CAGR of 4.1% from 2014 to 2018. On water
industry, water consumption grew at a CAGR of 6.3% from 0.31 million m³/day in 2008 to 0.42
million m³/day in 2013, and projected to grow at steady CAGR of 3.2% from 2014 and 2018.
c) Saudi Arabia
Total electricity consumption reached 256,688 GWh in 2013, and grew at CAGR of 7.2% from
2008 at 181,098 GWh and expected to grow at 6.3% between 2014 and 2018 on expanding
domestic demand. Meanwhile, total water consumption stood at 47.4 million m³/day in 2013,
marking a CAGR of -4.2% from 58.8 million m³/day in 2008. Total water consumption in Saudi
Arabia is projected to remain stagnant at a CAGR of 0.1% to 2018.
Valuation and recommendation
We value Malakoff at RM2.30 based on DCF valuation, pegged at WACC of 6.0%. As such, we begin
coverage of Malakoff with a BUY call. At the issue price of RM1.80, Malakoff dividend yield is set to
fetch 3.2% in FY15 based on 70% payout ratio. We recommend investors to look at the Malakoff’s
consistent and continuous capacity payment until the expiry of PPAs. Additionally, Tanjung Bin
expansion is set to drive Malakoff’s topline to surge by 21.7% in FY16. Upside potential against our
target is 27.7%.
Initiation Coverage – Malakoff Corporation Bhd
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
Table 13: Malakoff Profit and Loss
FYE December (RM million)
FY13 FY14 FY15F FY16F FY17F
Turnover 4,717 5,594 6,440 7,842 7,669
EBITDA 1,173 2,461 2,360 2,810 2,855
Depreciation & Amortisation
-471 -1,087 -1,128 -1,115 -1,118
Operating Profit 702 1,332 1,232 1,696 1,738
Interest Income 161 133 143 94 2
Interest Expense -840 -911 -816 -707 -841
Associated Co. 71 42 170 176 189
Exceptional Items 0 0 0 0 0
PBT 94 595 729 1,258 1,088
Taxation 151 183 -175 -302 -261
PAT 245 413 554 956 827
Minority Interest -73 -71 -138 -190 -186
Net profit 172 342 417 766 641
Margin
EBITDA 1,173 2,461 2,360 2,810 2,855
Operation Margin 15% 24% 19% 22% 23%
PBT 84 595 729 1,258 1,088
PAT 235 413 554 956 827
Net Profit 162 342 417 766 641
Effective Tax Rate 179% 31% -24% -24% -24% Source: M&A Securities, Prospectus
Initiation Coverage – Malakoff Corporation Bhd
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
Table 14: Malakoff Balance Sheet
FYE December (RM million)
FY13 FY14 FY15F FY16F FY17F
Non-Current Assets
Prop Plant & Eqpt 13,061 14,324 15,213 16,085 16,970
Intangible asset 5,071 4,704 4,669 4,643 4,812
Prepaid lease payment 75 70 75 75 75
Investment in associates 1,294 1,203 1,289 1,262 1,252
Investment in JV 51 58 52 54 55
Finance lease receivable 2,013 1,991 1,000 1,000 1,000
Other receivable 127 115 121 118 119
Deferred tax asset 698 780 696 725 734
Total non-current asset 22,470 23,344 23,214 24,060 25,115
Current assets
Trade Receivable 1,266 1,304 1,147 1,397 1,366
Inventories 479 518 1,453 1,792 1,714
Current tax assets 311 272 265 283 273
Cash & Bank Balances 2,376 3,575 2,360 57 1,112
Other investment 1,166 322 300 300 300
Total current assets 5,598 5,992 5,524 3,828 4,765
Total Assets 28,068 29,336 28,738 27,888 29,880
Non-Current Liabilities
Loans and borrowing 16,612 17,493 15,157 12,939 11,903
Employee benefit 67 75 80 80 80
Deferred income 2,608 2,811 3,092 3,402 3,742
Deferred tax liabilities 2,645 2,721 3,129 3,599 4,138
Total non-current liabilities
21,965 23,268 21,609 20,169 20,013
Current Liabilities
Trade and other payables 934 976 1,095 1,333 1,304
Current tax liabilities 4 24 4 4 4
Loans and borrowing 932 734 1,639 1,639 3,607
Deferred income 60.263 130 131 200 222
Total current liabilities 1,965 1,892 2,903 3,211 5,171
Total Liabilities 23,929 25,159 24,511 23,380 25,184
Financed by:-
Share Capital 356 356 356 356 356
Share Premium 3,576 3,576 3,576 3,576 3,576
Reserves 157 61 61 61 61
Retained earnings (172) (29) 96 326 518
Minority Interests 223 213 138 190 186
Total Equity 4,139 4,177 4,226 4,509 4,696
Total Liabilities and Equity
28,068 29,336 28,738 27,888 29,880
Source: M&A Securities, Prospectus
Initiation Coverage – Malakoff Corporation Bhd
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
Table 15: Malakoff Cash Flow
FYE December (RM million) FY13 FY14 FY15F FY16F FY17F
Operating Cash Flow
PBT 84 595 729 1,258 1,088
Adjustment For:
Impairment loss on trade receivables 177 49 50 50 50
Amortization of prepaid lease payments 4 4 4 4 4
Amortization of intangible assets 470 512 607 604 626
Depreciation & Amortization 471 559 628 615 618
Finance costs 840 911 816 707 841
Interest income -161 -133 -143 -94 -2
Net fair value gain on derivatives 0 0.00 0 0 0
PPE written off 127 21 128 135 143
Provision for retirement benefits 13 12 10 10 10
Reversal of impairment loss on trade receivables -6 -3 -5 -5 -5
Associated Company -61 -42 -170 -176 -189
Operating profit before changes in working capital 1,927 2,495 2,656 3,110 3,185
Changes in Working Capital 401 -140 704 -3,993 168
Operating profit before changes in working capital 1,527 2,584 3,360 -883 3,353
Deferred income 279 273 250 250 250
Employee benefit -17 -4 -8 -8 -8
Cash generated from operation 1,790 2,853 3,602 -641 3,595
Income tax refund/paid -153 -151 -160 -160 -160
Net cash from operating activities 1,637 2,702 3,442 -801 3,435
Investing Cash Flow
Acquisition of PPE -2,535 -1,615 -1,393 -1,444 -1,507
Dividend received from associates 54 20 46 40 35
Interest received 146 112 143 94 2
Increased investment in associate 0 -37 -30 -30 -30
Proceeds from redemption of unsecured loan stocks
0 30 37 33 33
Redemption of unsecured loan stock -20 -58 -45 -41 -48
Net cash from investing activities -1,427 -856 -1,242 -1,347 -1,514
Financing Cash flow
Dividend paid to the owner of the company -191 -199 -191 -191 -191
Dividend paid to non-controlling interest -190 -82 -190 -190 -190
Interest paid -923 -966 -816 -707 -841
Changes in debt 772 599 -2,218 933 355
Net cash used in financing activities -533 -647 -3,415 -155 -867
Changes in cash -323 1,199 -1,215 -2,303 1,055
Cash at beginning of the year 2,698 2,376 3,575 2,360 57
Cash at end of the year 2,376 3,575 2,360 57 1,112 Source: M&A Securities, Prospectus
Initiation Coverage – Malakoff Corporation Bhd
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Research Team research@mna.com.my 03-22877228 ext 229,221,219,249,238
M&A Securities
STOCK RECOMMENDATIONS BUY Share price is expected to be ≥+10% over the next 12 months. TRADING BUY Share price is expected to be ≥+10% within 3-months due to positive newsflow. HOLD Share price is expected to be between -10% and +10% over the next 12 months. SELL Share price is expected to be ≥-10% over the next 12 months. SECTOR RECOMMENDATIONS OVERWEIGHT The sector is expected to outperform the FBM KLCI over the next 12 months. NEUTRAL The sector is expected to perform in line with the FBM KLCI over the next 12 months. UNDERWEIGHT The sector is expected to underperform the FBM KLCI over the next 12 months. DISCLOSURES AND DISCLAIMER This report has been prepared by M&A SECURITIES SDN BHD. Readers should be fully aware that this report is for informational purposes only and no representation or warranty, expressed or implied is made as to the accuracy, completeness or reliability of the information or opinion contained herein. The recommendation and opinion are based on information obtained or derived from sources believed to be reliable. This report contains financial forecast/projection based on our assumptions which may defer from the actual financial results announced by the companies under coverage. All opinions, estimates and assumptions are subject to change without notice. Analysts will initiate, update and cease coverage solely at the discretion of M&A SECURITIES SDN BHD. Investors are to be cautioned that value of any securities invested may fluctuate from time to time. We advise investors to seek financial, legal and other advice for investing based on the recommendation of our report as we have not taken into account each investors’ specific investment objectives, risk tolerance and financial position. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. M&A SECURITIES SDN BHD can accept no liability for any consequential loss or damage whether direct or indirect. Investment should be made at investors’ own risks. M&A SECURITIES SDN BHD and INSAS GROUP of companies, their respective directors, officers, employees and connected parties may have interest in any of the securities mentioned and may benefit from the information herein. M&A SECURITIES SDN BHD and INSAS GROUP of companies and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. This report may not be reproduced, distributed or published in any form or for any purpose. M & A Securities Sdn Bhd (15017-H) (A wholly-owned subsidiary of INSAS BERHAD) A Participating Organisation of Bursa Malaysia Securities Berhad Principal Office: Level 1,2,3 No.45 & 47 The Boulevard, Mid Valley City, Lingkaran Syed Putra, 59200 Kuala Lumpur Tel: +603 – 2282 1820 Fax: +603 – 2283 1893 Website: www.mnaonline.com.my
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